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2. The Next Wave: The Expansion of State False Claims Acts and Enforcement July 23, 2013Dave Nadler #3183346

3. Agenda • Federal and State FCA Profiles • Keys to Federal FCA Success • Recent State FCA Activity • What to Expect

4. Most State FCAs Are Based on the Federal Model • The False Claims Act (“FCA”) was originally enacted in 1863 to combat fraud perpetrated by Civil War contractors against the Federal Government. • In 1986 Congress significantly expanded the FCA to “reach all fraudulent attempts to cause the Government to pay out sums of money or to deliver property or services.” The FCA was again substantially amended in 2009 (i.e., FERA Amendments). • Today, the FCA penalizes any person who “knowingly presents or causes to be presented, a false or fraudulent claim for payment or approval…,” including making a false record or statement in order to facilitate the payment of a false claim by the Federal Government.

5. Most State FCAs Are Based on the Federal Model • The FCA permits private citizens to bring a “qui tam” (whistleblower) suit in the name of the United States. • The relator shares in the proceeds of any recovery. • DOJ may choose to intervene as of right in any qui tam suit. • If the Government intervenes the relator’s share is at least 15% but no more than 25%. • If the Government does not intervene the relator’s share increases to between 25% and 30%. • Violators of the FCA are liable for treble damages plus a civil penalty of $5,500 to $11,000 per claim.

6. State FCA Profile – Overview of State Statutes • 36 states and the District of Columbia have enacted false claims legislation. • 13 of these states have statutes specifically directed at fraud involving Medicaid and other state healthcare programs. • 20 states and the District of Columbia have statutes that encompass fraud against the government generally. • 3 states have both a Medicaid-specific statute and a general false claims statute. • 29 states and the District of Columbia permit whistleblower suits.

7. State FCA Profile – Federal Incentives • The Federal Government encourages states to adopt the Federal model in joint state-federal programs, such as Medicaid, including provisions for rewarding and encouraging qui tam suits. • Financial incentives – an additional 10% share of Medicaid recoveries • Recent expansion of Federal FCA case law in several key areas (e.g., expansion of liability and damages theories) could push states to follow suit or risk losing the financial incentives.

8. Federal FCA Success • Between 1987 and 2011, the Federal Government has collected over $30 billion from FCA cases. • FY 2012 continued the trend, with the Federal Government collecting a single year record of $4.9 billion in civil FCA settlements and judgments (with several recoveries over $1 billion). • FY 2012 collective statistics include: • 647 qui tam suits filed (compared to 30 in 1987); • 135 non-qui tam suits filed; • $3.3 billion recovered in whistleblower suits (compared to $0 in 1987 and $2.4 billion in 2010); • $439 million recovered by relators; • Over $3 billion recovered from health care fraud; • $1.4 billion recovered from housing and mortgage fraud; and • $427 million recovered for procurement fraud (i.e., goods and services purchased by the Federal Government).

9. Federal FCA Success • Significant individual FCA recoveries in FY 2011 and 2012 include: • $1.5 billion to resolve civil claims against GlaxoSmithKline LLC (part of an overall $3 billion settlement) – the largest fraud settlement in U.S. history • $1.5 billion to resolve claims against Abbot Laboratories • $950 million to resolve claims against Merck Sharp & Dohme • $202.3 million settlement with Deutsche Bank AG • $200 million from Oracle Corp. and Oracle USA (largest settlement ever obtained under a GSA contract) • $158.3 million settlement with CitiMortgage Inc. • $132.8 million settlement with Flagstar Bank

10. Keys to Federal FCA Success – Procedural • DOJ substantially leverages the qui tam bar to augment its capabilities and resources. • DOJ often defers intervention decision (“not intervening at this time”) – Best of all worlds. • Maintains the constant threat of intervention without having to actually intervene; continuous pressure on defendants. • DOJ maintains ultimate control over the litigation. • DOJ can intervene at any time and take over the case. • Even if it does not intervene, DOJ must approve all settlements; can force continued litigation between relators and defendants if settlement is too low. • DOJ still recoups most of any recovery but expends minimal effort and avoids litigation risk in doing so.

11. Keys to Federal FCA Success -- Substantive • Recent developments have made it more difficult for defendants to dismiss complaints on the pleadings. • Expanded liability theories • Expanded damages theories • Expanded relator pool • Narrowed defenses • Generally, if the case moves into discovery and beyond, the prospect of settlement increases due to the expense of litigation and the prospect of treble damages, administrative sanctions, and reputational harm.

12. Keys to Federal FCA Success – Expanded Liability Theories • Implied certification theory • Traditionally, FCA liability has required the plaintiff to plead with specificity that the defendant made a false statement or certification – i.e., some overt act – which can be difficult to do at the complaint stage without the benefit of discovery. • The implied certification theory does not require an overt act or statement. • Instead, defendants impliedly certify that they are in compliance with all statutory, regulatory, and contractual provisions that are preconditions to payment or participation. • Effectively lowers a plaintiff’s pleading burden because there is no need to allege an overt act or requirement to certify compliance with the underlying law or regulation.

13. Keys to Federal FCA Success – Expanded Liability Theories • Implied certification theory potentially transforms every breach of contract dispute into actionable fraud. • Virtually any term or condition in a contract can now serve as the basis for a false claim, regardless of whether they are material or a condition of payment. • Most state contracts have hundreds of contract provisions and incorporate by reference scores of statutes and regulations. • Noncompliance with any one of these could potentially be the basis for a false claim.

14. Keys to Federal FCA Success – Expanded Liability Theories • Expanded definition of materiality – “having a natural tendency to influence, or be capable of influencing,” a payment decision. • This very broad definition, when paired with the implied certification theory, transforms virtually any statutory, regulatory, and contractual violation into actionable fraud, even if it had no impact on the government’s payment decision. • “Reverse false claims” – Companies can now be liable when they knowingly retain an overpayment by the government, even if the overpayment was not caused by any action of the contractor.

15. Keys to Federal FCA Success – Expanded Liability Theories • Recent amendments have expanded the reach of the FCA: • Previously, the FCA required “presentment” of a false claim directly to the government. • Now, FCA applies whenever Federal funding is involved, regardless of who pays the claim. • Expands the pool of defendants subject to the FCA. • For example, subcontractors, grantees, or other entities who do not directly submit claims to the government, but receive federal funding from their prime contractors or grantors, are now covered. • Applies to non-traditional government contractors like Lance Armstrong – government alleges that false statements made to USPS to induce its assent to an advertising contract constitutes a false claim.

16. Keys to Federal FCA Success – Expanded Damages Theories • DOJ is pursuing “fraudulent inducement” theories to maximize FCA damages. • Used where defendant is alleged to be ineligible to receive the contract or perform the work, but represents otherwise. • But for the defendant’s misrepresentation, the government would not have contracted with the defendant. • Examples include loan programs, small-business set asides, Trade Agreements Act or other preference requirements, socio-economic requirements, and Medicaid eligibility. • Damages are disgorgement – the full contract value X 3, plus penalties.

17. Keys to Federal FCA Success – Expanded Relator Pool • Expanded relator pool • Government employees can be relators – even when they learn of the facts underlying their claim while performing their job. • Courts have rejected the government’s argument that government employees lack standing and present conflict of interest concerns. • For example, courts have held that government auditors who audited the defendant, and learned the basis of their complaint from that review, have standing to be FCA relators. • Government employees often possess more and better information of the alleged fraud and, thus, file complaints that are more likely to survive a motion to dismiss.

18. Keys to Federal FCA Success – Narrowed Defenses • Recent trends have made it more difficult for defendants to dismiss complaints on the pleadings, which increases the chances for settlement. • Expanded liability and damages theories have effectively relaxed plaintiffs’ pleading requirements. • Defenses have been scaled back. • For example, regarding the public disclosure bar: (i) fewer types of disclosures are now considered public, (ii) relators do not need direct knowledge of the complaint allegations, and (iii) DOJ can veto any court dismissal.

19. Recent State FCA Activity • Many states are expanding their FCA laws beyond Medicaid • GA and NC recently enacted new laws extending qui tam provisions and treble damages to non-Medicaid fraud. • CA, HI, MA and TN recently updated their FCA statutes to square them with Federal amendments. • Proposed legislation in AL, AZ and MI would create new qui tam provisions and treble damages for fraud under any state contract. • States are pursuing new and novel uses of FCA laws. For example, NY’s FCA law was amended in 2010 to allow whistleblowers to pursue false claims related to state and local taxes.

20. Recent State FCA Activity • 2012 Significant Settlements • Johnson & Johnson subsidiary reached a $158 million settlement to resolve Medicaid fraud claims in Texas, as well as $181 million to resolve claims in 36 other states and the District of Columbia. • McKesson Corporation agreed to pay 30 states over $151 million to settle a Medicaid fraud suit. • Senior Care Action Network reached a settlement of $323 million with California and the Federal Government to resolve state and Federal FCA claims. • Compass Group USA, Inc. reached an $18 million settlement with New York to resolve FCA claims related to improper overcharging for food services.

21. Recent State FCA Activity • James D. “Buddy” Caldwell v. Janssen Pharmaceutical Inc. et al.,(La.) (2012) • $258 million in civil penalties, $70 million in attorneys’ fees, and $3 million in costs for Medicaid violations. • Mohan’s Custom Tailors, Inc., (NY) (2012) • $5.5 million settlement of tax evasion claims under the NY FCA; first successful use of the 2010 amendments to the NY FCA, which expanded FCA coverage to substantial violations of tax law. • People of the State of New York v. Sprint Nextel Corp., (NY) (2013) • Ongoing $300 million tax fraud case under the NY FCA.

22. What to Expect • Expect state FCA activity to continue to rise both as a potential means of addressing budget shortfalls and to root out fraud in various industries. • Expect states to continue to apply their FCA statutes beyond the Medicaid context to all manners of procurement, and to extend the reach of their statutes in new and creative ways to other types of misconduct such as tax fraud. • Expect states to continue to tailor their statutes to the Federal model to benefit from Federal incentives, and to leverage expansive Federal theories to increase recoveries.

23. What to Expect • Expect the plaintiffs’ bar to continue to move aggressively into this space • Plaintiffs’ lawyers are already active in Federal qui tam actions, and have cultivated contingency fee work from AGs in consumer protection, Medicaid, and other suits. • Qui tam litigation gives them the opportunity to encourage state action and bring the authority of AGs to bear on targets without being formally retained by states. • Private counsel receive a share of the state’s settlement or litigation recovery (15-30%) whether the AG intervenes or not. • Expect cases to be increasingly complex and costly to defendants because qui tam cases can include claims under multiple states’ FCAs, but do not necessarily benefit from the coordinated discovery and settlement that occurs in traditional multi-state litigation.

24. Contact Information Dave Nadler202-420-2281NadlerD@dicksteinshapiro.com

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